Cost Targeting
Cost targeting is the pricing method which has to be used by the firms. It is defined as the cost management tool used for reducing the overall cost of the product over its entire life-cycle with the help of the production, engineering, research and design. A target cost is the maximum amount of the cost which can be incurred on the product and with which the firm can still earn the necessary profit margin from the product at a particular selling price.
In the traditional cost-plus pricing method the materials, the labour and the overhead costs will have to be measured and also the desired profit should be added to estimate the selling price. The costs can be divided into five categories and are as follows:
- Budgeted Cost: The budgeted cost can be derived from the detailed cost estimate which is prepared at the start of the project.
- Estimated total cost: The estimated or forecasted total cost in each of the category is the best present estimate of the costs based on the progress and any of the changes since the budget was formed. The estimated total costs are the sum of the cost to date, the commitments and the exposure.
- Cost Committed and Cost Exposure: The estimated cost to completion in each of the category is divided into firm commitments and additional cost or exposure. The commitments may represent the material orders or the subcontracts for which the firm's finances would have been committed.
- Cost to Date: The actual cost incurred till date will be recorded and can be derived from the financial record keeping accounts.
- Over or (Under): This indicates the amount over or under the budget for each of the category. This column will indicate the extent of the variance from the project budget; items with unusually large overruns which would represent the specific managerial concern.
The project cost control is more difficult to do in practice which is proved by the number of projects which have failed to contain the costs. It will also involve an important amount of work from the beginning.